By Allyn Hughes, CFP®, ChFC®, CLU®, CAP®
Impact of new tax laws on charitable contributions
It is estimated that 36 million Americans made tax-deductible charitable contributions to not-for-profit organizations in 2017. These contributions created benefits for all—they reduced the taxable income of the donor and provided important working capital and support for the non-profit agency. In 2018, the number of Americans making tax-deductible charitable contributions is expected to drop dramatically to roughly 16 million, according to the Tax Policy Center. The expected reduction is mostly due to the increase in the size of the standard deduction for American tax-payers as a result of the passage of the Tax Cuts and Jobs Act of 2017. In 2017, couples who filed their taxes jointly, had a $12,700 standard deduction. This meant that any deductible expenses above $12,700 could be used to reduce the taxable income of the taxpayer if they itemized their tax returns. For individuals this standard deduction was $6,350.
For 2018 the size of the standard deduction will almost double to $24,000 for a couple or $12,000 for single filers. In exchange for this increase, congress created lower limits on how much of some often-used expenses can be deducted. For instance:
- Deductions for state and local taxes – including local property tax – are capped at $10,000 per year.
- Deduction for mortgage interest has also been limited to mortgage amounts of $750,000 or less. This reduced the amount of interest that may be deducted.
- Payments of fees to financial advisors (like BHJ) are no longer deductible.
But, Congress also decided that for 2017 and 2018, unreimbursed medical and dental expenses will be deductible only to the extent that they are above 7.5% of adjusted gross income (AGI). This percentage will actually increase to 10% of AGI next year, so it will become more difficult to qualify for this deduction. Fewer Americans have deductions that total more than $24,000. Although charitable gifts will continue to be deductible, for most people, this deduction will be included in their standard deduction. Therefore, they won’t get a separate deduction for their charitable contributions.
If you don’t receive a tax deduction for a contribution that you make to a not-for-profit, would you still support the organization? We hope the answer is “yes.” We think that it is important that Americans continue to support the charitable organizations that work to improve all of our lives. Here are four strategies to consider when thinking about supporting your favorite causes or organizations and still potentially receiving some tax benefit:
- If you are over 70½ and are taking annual Required Minimum Distributions (RMDs) from your IRAs, you may route up to $100,000 of the RMD each year directly to charities without paying income tax on the IRA withdrawal. You will need to work with your financial advisor or your IRA custodian to make sure that the checks for these RMDs are made payable to the charities even if they are sent to you.
- Plan to accrue a portion of your take-home pay each year for charitable contributions. Keep this money in a separate savings account. Use this account to make gifts only in years when your total deductions are above $24,000 (if married filing jointly), or $12,000 if you file as an individual. If your deductions are high due to high medical costs or other deductible expenses during a year, plan to gift to charities during that year. Making this gift from this savings account will allow you to feel less “poor” in years when your expenses are higher.
- Consider creating a Donor Advised Fund (DAF) with a larger amount than you might otherwise gift in a single year. This will allow you to contribute a larger amount to this fund and take the deduction. Then you can make smaller donations to charitable organizations in later years. If the money in the DAF is not distributed to a charitable organization, it can be invested and it will grow tax-free until it is distributed.
- Gift stocks or other appreciated assets for which you don’t know the cost basis. Even if you don’t receive a tax deduction, you would still avoid paying capital gains tax on the growth in the asset.
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